William Porter, Christian Schwarz, Chiraag Somaia
Greece’s one-date calendar
Credit Suisse, Research 22 April 2015
The “Greece situation” is evolving to be not about Greece but about the ECB. We think it is the most vulnerable presence in the debt stack, if only because it is next to receive what we see as a clearly unaffordable payment. We see the position of the private debt as being relatively strong.
Reading the documentation governing Greece’s debt highlights again to us the importance of the 20 July date; we see it as equivalent of the 20 March 2012 date which was clearly visible in advance as an uncrossable hurdle. Only this time the dynamics are more subtle; the €7.2bn disbursement being fought over will essentially round-trip back to the Eurosystem.
Our appraisal of the probabilities is broadly unchanged; 75% agreement in the nick of time, 20% exchange controls and 5% complete financial collapse.
The false premises of “the Grexit1 conversation” are slowly giving way to a more nuanced discussion of exchange controls and state IOUs. But the possibility of default still gives rise to flawed analysis, in our view. For example, ‘Greece CAN default and remain in the euro; it has effectively done so once.’ Likewise IOUs: ‘did California “exit” the dollar? It did not’.
We simply stick to our long-held view that “Leaving EMU is an expensive way to default” for all concerned and is a dominated equilibrium because it means systemic bankruptcy of the Greek banking system and possibly elsewhere. Even though dominated, the possibility of a “sleepwalking moment” or a “tragic mistake” remains; our 5%. We must distinguish between “what must not happen”, “what should happen”, “what is too horrible to contemplate” and “what will happen”.
Where we differ with the market is in our view that in our 20% failure case, GGBs may well still be a par asset, so we still think they are attractively priced; the volatility we have expected is intense, however and we see no reason for it to stop ahead of 20 July.
20 July is still the date
Greece is manifestly running out of money and there is intense debate about the run-up to the 12 May IMF payment (see IMF payment schedule in Appendix) of €750mn approx. The tradeoff is currently seen as being “cash for reforms”; if the ex-Troika can approve Greece’s reforms, with 24 April being aimed at, then €7.2bn of funds remaining under the second assistance program can be disbursed.
It is not clear whether Greece can make the 12 May IMF payment without this happening. We think on balance it can and that focus on this date misses the point.
This is because on 20 July half of this amount, €3.491bn, would go back to the Eurosystem2, with the other half (in round numbers; actually, €3.188bn) due on 20 August. This is a pure round-trip.